Outsourcing vs. Offshoring vs. Nearshoring: What's the Difference?

One of the most challenging aspects of making any large, new business decision can be the learning curve leadership is confronted within the early stages of the process. Assembling all of the information you need to make a final decision can seem overwhelming when you're unsure where to start, and that can certainly be true when it comes to outsourcing business process operations (BPO). To the unfamiliar, the jargon consists of a slew of similar-sounding words whose meaning isn't necessarily immediately clear. It can feel a little like learning a new language without the help of a phrasebook. Take the difference between outsourcing and offshoring, for instance, or the difference between offshoring and nearshoring. Clearing these up ought to give you a better idea of where to start to make the best decision for your organization if you're looking into taking some of your work out-of-house. Read on to learn the definitions and differences of outsourcing vs. offshoring vs. nearshoring.

Outsourcing

It helps to think of outsourcing as the umbrella that covers the other two terms. It's a business practice and really just refers to leaving some part of your company's in-house operations to a contracted third-party. That third party could be up the street, across the country or on an entirely different continent – it doesn't matter where the work is done. The fact that it's done by an individual or entity not directly employed by your organization is what makes it an outsourced operation.

Nearshoring

Nearshoring refers to a business process or service that is outsourced and performed in a different country than the one the outsourcing organization is in. Usually, this is much closer to the company's home country, usually sharing a border – hence the prefix "near". For example, a U.K.-based organization might outsource its information technology (IT) processes to the nearby Balkans.

Offshoring

When a business takes some process or service to a different country, in an entirely different geographic region than the one they're in, that's offshoring. It's what a lot of people think of immediately when they hear the word "outsourcing." For instance, a company in the United States might have a remote team of graphic designers or CPAs in the Philippines.

Types of Outsourcing

Let's start with the overall concept of outsourcing. What does it look like in practice? Well – a lot! Because it's such a broad concept, it covers a whole lot of ground, sometimes quite literally!

A restaurant chain headquartered in California might outsource some or even all of its marketing operations by hiring an agency operating out of Florida to rebrand the chain and create the accompanying commercials announcing the rebrand.

OR

A small diner with a single location in Kansas might put an ad in the paper to find a freelance graphic designer or use the services at a big box office supply store to create a logo and print menus.

OR

A successful and growing startup in New York could split their accounting department in half, with an in-house CPA that manages items like budgeting and forecasting while a bookkeeper in the Philippines handles tasks related to payroll, accounts payable and the monthly close.

OR

A one-man 3-D printing operation in Texas might rely on small business software that helps keep track of invoices and enables his cell phone to process credit card payments while complying with state tax guidelines.

This goes to show how broad the concept of outsourcing can be. It can be used to manage a major operation, or a part of one. It can be done using a local resource or an international one.

The BPO Breakdown: Understanding Outsourcing, Offshoring, and Nearshoring Options

Companies outsource for a slew of reasons. In the examples above, each company is using a third-party contractor to handle some part of their business operations through a freelance or vendor model. Their reasons could include:

• The company needs to find more talent than they already have access to in order to deliver work of a certain quality on time, as with the example of the chain restaurant.

• An organization may not have enough work to justify hiring an individual or a team to stay in-house full time, like the diner in the second example.

• A business might need to save money on value-neutral tasks (like bookkeeping) in order to focus on business-critical work (like development), just like the startup.

• The company needs access to capabilities and expertise they otherwise couldn't afford, like the owner of the 3-D printer.

• The business needs to improve efficiency in one or more processes, so they can deliver higher-quality goods, services and experiences overall, which is true for each example.

More: The Advantage of Outsourcing Your Back Office Support Needs

Why businesses outsource is a question of complexity, but a few things are universal. Every business will outsource at some point – whether through a freelance, contractor or business process outsourcing (BPO) model. Every business will need to find an outsourcing model that works for them, and there are multiple models available.

Can Nearshoring Work for Your Business?

If a company has decided to outsource to an international location, they'll need to decide which model is best for them: offshoring vs nearshoring. It might help to look at why companies choose the respective outsourcing models by doing a quick review of the pros vs cons of nearshoring alongside the risks and benefits of offshoring:

Choosing to offshore comes with a ton of benefits, like:

• Access to high-quality talent for less money

• Access to talent that's unavailable at home

• Lower overall operating costs

• Time-zone differentials that allows for work to be done anytime

• Typically, there's a well-established BPO infrastructure in place

• Global business done with a global team

• A leg up in accessing overseas markets

The concerns associated with offshoring may be familiar to you, too:

• Remote teams that are located a considerable distance away

• It's harder to oversee every aspect of the process you've outsourced

• Overseas teams speak different languages than nearby teams

• Overseas teams have an entirely different culture than yours

And nearshoring is attractive to businesses that:

• Are looking for a way to cut costs without sacrificing proximity

• Want to outsource work that can be done cheaply in the same time zone

• Want to play it safe with possible communication barriers

• Want to have face-to-face interactions with remote teams

• Are hoping to work with a culture similar to their own

And has risks that are unique and inherent:

• Nearshoring is simply more expensive than offshoring

• Nearshoring means relatively new destination countries without BPO infrastructure

• Where there's a border, there is sometimes tension

• Proximity doesn't always equal cultural or linguistic compatibility

The two models, as you've likely gathered, are very similar in a lot of ways, so how do you decide which one is right for you?

More: Accounting Talent: In-house vs. Offshore Teams

Nearshoring can be a great choice for organizations that are new to outsourcing and aren't sure what to make of some of the common myths and misconceptions surrounding the process of moving a part of their business overseas. For instance, if you're worried that you have to relinquish control, being able to get to a nearshore site relatively quickly and regularly might bring you some peace of mind.

Organizations that lack global communication experience might be more comfortable knowing that their remote teams are likelier to speak the same language or observe the same kinds of holidays they do. Or, companies that need to have everything delivered across the same time zone will choose nearshoring especially if they want all team members – both in-house and outsourced – to work the exact same hours for any reason.

More: The Truth About Working Across Time Zones

There are also, unfortunately, reasons that nearshoring isn't always as attractive as it first appears. Cultural compatibility isn't always a given. There's a significant difference between the cultures of Canada and Mexico, for instance, but both are considered nearshore locations for U.S. companies.

The same can be said of the height of each country's respective language barrier. In the Philippines, there's a 92 percent English proficiency rate. In Mexico, it's around 12 percent. That's excellent news if you're specifically looking to outsource a narrow slice of your customer experience operation – if you've decided to make it easier for Spanish-speaking customers to get the support they need, for example – but not as encouraging if you need a broader solution.

Nearshoring can save you money, that's true, though not as much as offshoring. It may be more important to consider that some nearshore nations are relatively new to the BPO industry. It takes time to set up the infrastructure, laws and cultural buy-in that's necessary to succeed at it. Some countries are making great strides, and some have a long way to go.

Expand Your Business Reach: Nearshoring vs Offshoring - Find Your Ideal Outsourcing Fit

When you're attempting to decide between nearshoring and offshoring, there are two critical components to keep in mind. First, many of the drawbacks associated with the offshore model have less to do with the model itself and everything to do with the BPO provider a company chooses. Fears about work quality, communication, security risk and relinquishing control are usually the result of horror stories from organizations that had the misfortune of working with a disreputable or ill-fitting provider.

More: What To Do When Your Outsourcing Provider Isn't Working Out

A BPO provider that functions as a partner and not just a vendor will hire well-trained, stateside comparable talent. For instance, in the Philippines, accounting professionals are certified to the same standards used by the U.S., and a partner-provider will work to source that talent, and not just find the cheapest available option. They will also go out of their way to invest in the talent they do hire to eliminate churn and build loyalty between you and your offshore team.

When it comes to communication, distance doesn't have to mean disparity. Many offshore powerhouse nations – like India and the Philippines – have acclimated entire metropolitan regions to accommodate BPO workers. This means that organizations can hire remote teams that work the same hours as they do. The thriving nightlife of cities like Manila, 24-hour services in New Delhi, and shift pay differentials all preserve the quality of life of your offshore workers.

Remote work is becoming the new normal even here in the U.S., and you can partner with a provider that knows their stuff when it comes to the software and best practices for overseas communication. Try to avoid providers that "gatekeep". If you've hired them to find you an Accounting Supervisor, there's no reason you shouldn't be able to regularly speak directly to that hire. A partnership that advocates and liaises for you without placing barriers in between you and your team is your best bet.

Free Download: Building B2B Client Relationships That Last

When it comes to security, countries that are BPO veterans are much better prepared to mitigate risk. They're ahead of the curve, having been "in the game" longer than emerging destination countries and are likelier to have standardization bodies operating in the country designed to ensure your data – or your clients' – is protected, and stays that way. Look for a partnership with a provider that has ISO certification and cybersecurity protocols in place that match the ones you have at home.

Finally, cultural compatibility is actually entirely achievable with an offshore model. In some cases, that's because nations with a Colonial history – like India and the Philippines – are used to welcoming newcomers in. That's certainly something anyone from the U.S. can understand having "been there" as a country themselves. What's most important is a mutual sense of respect and effort, and a legacy provider who can act as a cultural guide.

More: [PODCAST] Maximizing Cultural Compatibility in Outsourcing

Determining Whether Outsourcing, Nearshoring, or Offshoring Is Better

Like all major business decisions, this one is entirely dependent on each individual organization's needs, challenges, and goals. You'll need to look closely at which model (outsourcing vs. offshoring vs. nearshoring) is more likely to serve yours, and the best way to do this is often by enlisting the help of a BPO provider with a proven track record. At Personiv, we're firm believers that it's better to build a unique outsourcing model around each client, as opposed to forcing an organization to fit into a predetermined model. We've been doing precisely that for 35 years, and that's why some of our partnerships have been thriving for just as long.

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Give us a call. Whether you need to improve efficiency in finance and accounting, are looking for top-notch creative services or need to provide a customer experience that's second to none, we'll find you a team that's the perfect fit at just the right price.